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Officials Vow to Act Amid Signs of Long Recession

Treasury Secretary Henry M. Paulson Jr. spoke at the Fortune 500 Forum in Washington on Monday.Credit
Doug Mills/The New York Times

WASHINGTON — The United States economy officially sank into a recession last December, which means that the downturn is already longer than the average for all recessions since World War II, according to the committee of economists responsible for dating the nation’s business cycles.

In declaring that the economy has been in a downturn for almost 12 months, the National Bureau of Economic Research confirmed what many Americans had already been feeling in their bones.

But private forecasters warned that this downturn was likely to set a new postwar record for length and likely to be more painful than any recession since 1980 and 1981.

“We will rewrite the record book on length for this recession,” said Allen Sinai, president of Decision Economics in Lexington, Mass. “It’s still arguable whether it will set a new record on depth. I hope not, but we don’t know.”

Part of the drop may have reflected profit-taking after last week’s surge in stock prices, but it also came in response to new data showing that manufacturing activity dropped to its lowest point in 26 years.

Both the chairman of the Federal Reserve, Ben S. Bernanke, and the Treasury secretary, Henry M. Paulson Jr., vowed to use all the tools at their disposal to restore a measure of normalcy to the economy.

Mr. Bernanke, speaking to business leaders in Austin, Tex., said it was “certainly feasible” to reduce the Fed’s benchmark overnight lending rate below its current target of 1 percent, signaling that the central bank would lower the rate at its next policy meeting in two weeks.

And in an unusually explicit follow-up, Mr. Bernanke said the central bank was also prepared to use the “second arrow in our quiver” if policy makers have already reduced that rate, called the federal funds rate, to nearly zero.

Among the options, he said, the Fed can start aggressively buying up longer-term Treasury securities. That would have the effect of driving down longer-term interest rates. The Fed is already doing something of that sort, by buying up commercial debt from private companies as well as mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Investors reacted to Mr. Bernanke’s remarks by pouring money into longer-term Treasury bonds, which briefly pushed already-low yields on 10-year and 30-year Treasuries to new record lows. Investors appeared to be reacting mainly to the clear signal from Mr. Bernanke that the Fed was preparing to pump money into the economy by buying up longer-term bonds.

The yield on 30-year Treasuries declined 0.23 percentage points, to 3.21 percent, and briefly touched a record low of 3.18 percent. The yield on 10-year Treasuries fell 0.19 percentage points, to 2.73 percent.

In normal times, those kinds of yields would automatically mean lower interest rates on mortgages, automobile loans and other forms of consumer debt. But the credit markets have been stalled by continued fears among financial institutions about who can be trusted for even short-term transactions, so the effects on home loans and other purposes could remain modest.

Photo

Ben Bernanke, speaking in Texas, onscreen behind traders on the floor of the new York Stock Exchange.
Credit
Richard Drew/Associated Press

Mr. Paulson, in a speech in Washington on Monday, vowed to look at new ways to use the $700 billion bailout fund that Congress approved in October.

In Congress, Democratic leaders are drawing up a huge new fiscal stimulus plan that could total more than $500 billion. Democrats said they planned to have the measure ready as soon as Congress convened with a strengthened Democratic majority in January. Meanwhile, Democrats could take up legislation next week that would provide financial assistance to the automobile industry.

President Bush, increasingly the odd man out in the last weeks of his term, said his administration would do whatever was necessary to safeguard the system.

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“I’m sorry it’s happening, of course,” Mr. Bush said in an interview with ABC’s “World News” on Monday. “Obviously, I don’t like the idea of Americans losing their jobs or being worried about their 401(k)s. On the other hand, the American people got to know that we will safeguard the system.”

But many analysts said they saw no signs yet that the economy was nearing a bottom. American consumers, who for decades have been the country’s tireless source of growth when all else failed, have cut back on their spending more sharply than at any time since the early 1980s.

Consumer spending plunged in the third quarter of this year, and the evidence so far suggests they may pull back even more in the fourth quarter. Consumers account for about 71 percent of American economic activity, and their most recent retreat is occurring even though gasoline prices have dropped by almost half in the last month and left people with more money in their pockets.

In officially declaring that the current recession began in December 2007, the National Bureau of Economic Research paid little heed to the fact that the nation’s gross domestic product actually expanded slightly in the first and second quarters of 2008.

In explaining its decision, the bureau noted that a wide variety of other indicators, including payroll employment and personal income, peaked in December 2007. Payroll employment has dropped every month since then. Personal income declined and then zigzagged until June, and has declined steadily since then.

The gross domestic product often fluctuates widely from quarter to quarter, but it also received a somewhat artificial boost from the tax rebate checks that the government mailed out last spring and early summer as a temporary stimulus.

Ed McKelvey, an economist at Goldman Sachs, said the bureau’s starting point of last December for the recession was close to Goldman’s own estimates.

The announcement means that the downturn is already one year old. That is longer than the average length of 10.5 months for recessions since World War II. The current record for the longest recession over the last half-century is 16 months, which was reached in both the downturns of 1973-74 and 1980-81.

Mr. Sinai of Decision Economics said it was hard to imagine that this downturn would have hit bottom within the next four months, which would make it all but certain to set a new record.

Mr. Paulson, who teamed up with the Fed last week to begin a new $200 billion program to buy up consumer debt and small-business loans, said he had committed all but about $20 billion of the first $350 billion Congress authorized for the bailout fund.

“We are actively engaged in developing additional programs to strengthen our financial system so that lending flows to our economy,” Mr. Paulson said in his speech. “We are continuing to examine potential foreclosure mitigation ideas that may be an appropriate” use of the funds.

Democratic lawmakers have sharply criticized Mr. Paulson for refusing to use any of the money yet for reducing foreclosures. Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, warned last month that as many as 4.5 million people were likely to lose their homes through foreclosure. Ms. Bair proposed a plan that she said could prevent about one-third of those foreclosures.

A version of this article appears in print on , on Page A1 of the New York edition with the headline: Recession Began Last December, Economists Say. Order Reprints|Today's Paper|Subscribe